6 biggest business insurance risks

 6 biggest business insurance risks and how to mitigate them

6 biggest business insurance risks

This is the biggest small business insurance risk that you need to look out for as an entrepreneur.

- All companies face insurance risk, but the specific risk your company faces depends on factors such as industry, location, and technology use.

- Examples of insurance risks include data breaches, property damage, and manufacturing issues.

- Business insurance and other measures can reduce your risk level.

- This article is for business owners who are interested in learning about insurance risks and how to mitigate them.

Running a small business means exposing yourself to a certain amount of risk. You need safeguards to deal with the fallout should problems occur. Although some pitfalls and challenges cannot be avoided, they can be mitigated with proper precautions, planning and insurance coverage. Below, insurance and legal experts detail today's biggest insurance risks for business owners and what you can do to protect yourself from them.

What are the insurance risks?

Insurance risk refers to the possibility that something will go wrong that will expose your business - or the insurance company - to financial harm. Business risk and insurance risk often overlap. By fully understanding the different types of business risks, you can better understand insurance risks and thus how insurance can protect your business from serious problems.

Here are the four main categories of risk to consider:

- Operational: Operational risk deals with your company's day-to-day dealings, including handling equipment, workers, customers, and your product or service in general. By ensuring tangible assets such as equipment and property, you can mitigate risks, and by protecting your business operations from external events, such as natural disasters, you'll be covered.

- Strategy: Strategic risk occurs when your business strategy is weakened or usurped by yourself or other companies. When running a small business, you must develop and stick to a specific strategy for your product or service. If competitors undermine your strategy by outselling your product or service or lowering your prices, you risk falling behind in your industry. It is crucial to research your competitors and understand how to better protect your business' strategic assets, such as intellectual property rights.

- Compliance: Compliance risk relates to your business's ability to comply with certain rules and regulations set by your industry or government. This includes things like tax burdens, municipal zoning, property laws, distribution laws, and other rules and regulations related to your business — such as HIPAA or Good Manufacturing Practices. Eliminating compliance risk requires that you stay up to date with the latest rules in your sector. While you cannot purchase insurance related to taxes and other forms of compliance risk, you should be aware of your liabilities by understanding how your business could be at fault.

- Reputation: The last type of risk is reputation. This means protecting your business from security issues, data privacy breaches, and other cybersecurity issues. It also includes taking steps to protect your brand and logo. You can secure your business and customer data if either is compromised, you are covered.

Editor's Note: Looking for the right liability insurance for your business? Fill out the survey below to have our vendor partners contact you with your needs.

What are the biggest types of insurance risks?

The following largest insurance risks fall into one or more of the major categories: operational, strategic, compliance, and reputational.

1. Data breaches

Companies across all industries have seen an exponential increase in cybersecurity issues in recent years. Chris Roach, co-founder, and COO of Blackswan Cybersecurity said the data breach has hit fast food retailers and e-commerce companies hard. However, he has focused his attention on companies that accept credit cards.

One of the most important things you can do to prevent fraud is to make sure that your credit card technology meets EMV standards. Each company must also review its compliance with the Payment Card Industry Data Security Standards (PCI DSS).

“Compliance with PCI DSS protects the merchant from digital data security breaches across the entire payment network, not just a single card,” said Roach. "Failure to comply can result in penalties and fines if a data breach occurs on your end."

Electronic insurance is also an important consideration for small businesses. Miles Gibbons, Head of the Business Accounts Group at Travelers, noted the frequency of data breaches occurring in companies with 250 or fewer employees.

He added, "Electronic coverage has grown in importance to all types of businesses, and can help protect them from the costs of data breach notification, processing, card payment penalties, crisis management, and public relations."

2. Damage to property

Hurricanes, blizzards, floods, and fires can throw a serious wrench in your company's ability to operate normally. While your entire storefront or office may not have been destroyed, it is likely that you will not be able to run your business from that location while repairs are made.

“Only 50% of small business owners have a written business continuity plan, according to the Travelers Business Risk Index,” said Scott Humphrey, second vice president of risk control at Travelers. “Between extreme weather events and increased reliance on a complex web of technology and supply chains, business interruption risks abound.”

Insurance coverage is your first line of defense against property theft or damage. Gibbons pointed out that some companies are not sufficiently insured of their true values.

“Ask yourself if you have enough coverage to rebuild a business after a total loss,” he said. “Business owners must ensure that their premises and their contents—including shelving, display, inventory, and any new equipment—are properly insured. The property must be insured at full replacement value—not market value—including any recent improvements.”

Michael Freed, a commercial litigation attorney at Johnster Law Firm, urged business owners to consider business interruption insurance to maintain their cash flow, even if operations are temporarily halted.

“Business interruption insurance provides coverage for lost revenue and profits resulting from uncontrollable interruptions in business operations, such as those caused by natural disasters or a building fire,” Farid said. “When this type of injury hits, business owners need not only to rebuild where there was physical damage but to make up for lost revenue while doing so. This is especially critical for businesses with limited capital reserves.”

Furthermore, he advised Humphrey to make a plan so that his business would have a protocol to follow in the event of such an outage.

did you know

Most businesses will experience service interruption if they have a property damage claim, but business property insurance doesn't cover lost revenue—only lost property. Business interruption insurance is needed to cover lost revenue.

“To develop a plan, companies must identify the threats or risks that are most likely to occur based on historical, geographic, organizational and other factors, [and] conduct a business impact analysis [to determine] [what is] important to the survival of your business,” he said. Then, "adopt controls for mitigation and prevention, which can include emergency response, public relations, resource management, and employee communications."

3. Human capital costs

If you have employees, you will face a great deal of risk. Whether an employee is performing a labor-intensive task, driving a company car, or interacting with the public, there is a risk to the company, said Brian Robertson, partner at Hatcher Insurance.

“The need for industry-specific training and internal loss controls is more evident now than ever,” he said. “The employee needs to understand how their decisions and actions can significantly affect the well-being of the company, both positively and negatively.”

According to Tony Consoli -- national practice lead for healthcare, life sciences, and alternative risks at CBIZ Insurance Services -- changing market dynamics can mean big discounts across the board, which can also be a windfall financial risk.

"Although changes to the workforce are inevitable ... during difficult times, very few business owners know the risks involved in layoffs," said Consoli. "Unemployment insurance costs can be a prohibitive burden for employers." [Related article: The Small Business Guide to Unemployment Insurance]

Workers' compensation insurance is mandatory for companies with employees, but there are other insurance coverages you can get to mitigate your risk. Robertson advised looking into management liability and employers' liability insurance practices.

“This coverage protects owners and directors from discrimination-related claims against prospective, current, and former employees, as well as third-party claims,” he added. [Related article: Small businesses without insurance carry serious risks]

Careful planning for employee departures is the best thing you can do to avoid financial and legal recourse. Consoli recommended that benefits—such as severance packages, unused vacation pay, and continued health insurance coverage—be offered to laid-off employees. He also advised focusing on pending workers' compensation claims that could be affected by layoffs and making mid-year reviews of your resources to trim them when necessary.

4. Professional service errors

Service providers such as accountants, consultants, and web developers all face the ongoing risk of clients seeking legal recourse if their "product" does not meet expectations. Kevin Kerridge, CEO of small business insurance company Hiscox USA, said a common challenge for many small business owners is overcoming the mindset that their business is so good that no customer needs to sue them.

"A company does not have to make a mistake to face an allegation," he said. “One lawsuit, even an unjustified one, can set a small business back in time and money.”

Kerridge recommended that owners of any service-based business consider professional liability insurance.

He added, "This coverage protects the company in the event it receives a lawsuit alleging wrongdoing [and covers] defense costs and consequential damages up to an agreed limit, usually $1 million." "We see a range of claims on this, from tax preparers making a mistake on a customer's tax return to technology service providers providing a substandard work product."


When exploring insurance options, check which professional services organizations you belong to. They may have member benefits along with inexpensive professional liability insurance - a great way to save on insurance costs.

5. International manufacturing and export/transit issues

Many companies use overseas factories to manufacture their products or export their products internationally. Lots of things can go wrong during this trip, explained Lou Kamhe, vice president of sales for BNC Insurance & Risk.

Cammy recommended business interruption emergency insurance to mitigate the financial impact of an issue with a vendor in your supply chain, such as a fire at a manufacturer's plant. He also suggested foreign package policies to extend your insurance coverage to include the international exposures you might have.

6. Construction projects

According to the US Census Bureau, construction costs in the United States increased by 17.5% from 2020 to 2021 - the highest increase since 1970. According to Consoli, construction comes with a fair amount of risks that business owners should consider before moving forward. in the contract.

Consoli advised reading your insurance policies carefully to understand what it does and does not cover in terms of damages or injuries that occur during the project.

"Carefully review the insurance coverage and costs related to the project," he said. “What if a worker is injured on the job? Who pays for water damage during a storm? What happens if building materials are weeks late and this lengthens the entire project? Make sure all your ducks are in a row before expanding. Doing this will ensure proper coverage while also mitigating Financial risk on potential insurance bills.

How to identify the biggest insurance risk for your company

Kerridge said that every industry and every individual business within an industry deals with different levels of risk, both in terms of the likelihood of something happening and the severity of the consequences. However, simply ignoring these risks is not an option.

"There's no substitute for running a business professional and not cutting corners, but no matter how careful you are, bad things happen," Kerridge said. "It's worth buying as much insurance as your budget allows, as a backup."

"Sign up with the right moving company that is invested in your company's long-term success and provides the tools to mitigate losses," added Robertson. Each airline has its own industry niche, and it is important to [work] with a broker who will provide a complete risk management program, rather than just a cost-based approach.”

To assess your risk level, Farid advised choosing and building relationships with a "dream team" of advisors: a lawyer, accountant, insurance broker, and banker. He said each had something of value to contribute to efficient and effective risk reduction. [Related article: Finding the Right Accountant for Your Small Business]

“A consulting dream team, empowered to be proactive on your behalf, can help anticipate and avoid the pitfalls that plague many business owners,” Farid said. The old adage is absolutely true when it comes to mitigating risk: “An ounce of prevention is worth a pound of cure.”

How to choose the right insurance for your business

Not every business needs every type of insurance. Here's how to choose the right insurance for your business:

1. Evaluate your exposure to a particular risk. If you do not have products or supplies being transported, or they are insured by the company you are shipping them to, you probably do not need an inland marine policy. However, you may still need business interruption emergency insurance because an accident will stop your ability to manufacture and sell products.

2. Analyze your legal responsibilities. Do this with an insurance agent or attorney to find out which claims are most common against your organization.

3. Decide how much coverage you want. Getting more coverage is expensive, so you'll need to balance getting the most protection at a price that fits your budget.

4. Choose a provider based on your industry. Different service providers specialize in different areas. Find a provider who understands your risks and will help you mitigate potential claims.


This list of more than 20 types of small business insurance is a valuable overview of the policies you should consider for your business.

Why is insurance risk mitigation important?

Every business owner deals with risks in his company every day. Risk mitigation is critical to reducing the number of claims and lawsuits that your company may face. Having the correct insurance policies in place will provide protection should a claim arise. Insurance is an inexpensive way to cover the legal costs associated with claims and to deal with the actual settlements that arise from them. If you don't have the right policies in place beforehand, your organization could suffer the consequences.

Kimberly Leonard and Matt D'Angelo contributed to writing and reporting on this article. Source interviews were conducted for an earlier version of this article.

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